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Special Report

Navigating the Fiscal Cliff

Access an array of Morningstar and handpicked outside expert commentary on what's next for the fiscal cliff.

Investors felt a wave of relief when a bill to avert parts of the so-called fiscal cliff finally emerged from Congress on New Year's Day. The deal, among other things, maintained current tax rates for individuals making less than $400,000 a year, permanently fixed the Alternative Minimum Tax, kept parity between dividend and capital gains tax rates, and exempted estates smaller than $5 million from taxes. 

But what the deal didn't address has set up new question marks for investors. The mandatory cuts to defense programs and discretionary spending were only pushed off for two months, and both sides are far from agreement on how these cuts should be implemented. Democrats are looking for additional tax revenues to go with any additional spending cuts, something Republicans generally oppose. The deal also failed to address the long-term issues with entitlement spending that will have to be tackled at some point.

The new legislation additionally failed to raise the debt ceiling, setting up a battle that could come as soon as February to increase the federal government's statutory borrowing power. With President Obama insisting he will not negotiate over the debt ceiling and Republicans looking for major concessions in return for raising the ceiling, we could be bound for another bruising battle reminiscent of the August 2011 debt-ceiling debate that led to the downgrade of the U.S. credit rating.

Below, we've compiled Morningstar's take on the buildup to the deal, what the bill itself means for investors, and what's next. We've also included several outside expert opinions on these key issues. We'll update this page as negotiations continue, so be sure to check back regularly.

Morningstar's Take 
Cliff Crisis Averted, but Don't Get Too Comfy
(Jan. 5, 2013)
Part of the so-called fiscal cliff was avoided, but the economy will still feel related headwinds in the first quarter, and more skirmishes loom.

What the Tax Deal Means for Your Portfolio Plan
As 2013 dawns, so do changes in the tax rates on income, dividends, capital gains, and estates. (Jan. 3, 2013)

What the Cliff Compromise Means for the Economy (Jan. 2, 2013)
Congress' last-minute deal cut the so-called fiscal cliff in half, lessening economic headwinds in the short term, but much work remains to address longer-term debt and deficit issues, says Morningstar's Bob Johnson.

Possible Cliff Compromise Just a First Step (Dec. 31, 2012)
Even if Congress can expediently pass Monday's compromise on tax rates, big hurdles on entitlements, the debt ceiling, and possible further tax-code revisions await, says Morningstar markets editor Jeremy Glaser.

What Happens if There's No 'Cliff' Compromise? (Dec. 27, 2012)
If Congress can't reach a deal on the fiscal cliff prior to year-end, some effects will kick in sooner than others, says Morningstar's Bob Johnson.

How to Read a 'Cliff'-Induced Sell-Off (posted Dec. 25, 2012)
Short-term market gyrations over the unfolding Washington drama could make a good shopping opportunity for certain stocks, says Sanibel Captiva's Pat Dorsey.

Christine Benz's Tips for Turbulent Markets (posted Dec. 24, 2012)
Morningstar's director of personal finance recommends locking down short-term income needs in cash-like investments, stress-testing your bond holdings, and staying poised to buy on the dips.

Are Equity Fair Values Teetering on the 'Cliff'? (posted Dec. 22, 2012)
A lot of companies are very well positioned regardless of how the fiscal cliff gets resolved, as long as it gets resolved, says Morningstar's Heather Brilliant.

Fiscal Cliff Worries Disguise Strong Economic Data (Dec. 22, 2012)
Given the increasing and undeniable strength in the economy, we need not worry if some tax increases and spending cuts are implemented, writes Morningstar's Bob Johnson.

Will 'Cliff Woes' Completely Derail the Economy? (Dec. 21, 2012)
Morningstar's Bob Johnson sizes up how a stronger-than-expected economy may fare in different 'fiscal cliff' scenarios.

Retirement Prepping for the Fiscal Cliff (posted Dec. 21, 2012)
Financial columnist Gail MarksJarvis lays out planning strategies for taxes, Social Security, Medicare, and more, that retirees and pre-retirees should keep in mind amid U.S. budget uncertainty.

AMT Problem Looms Over Fiscal Cliff Debate (Dec. 20, 2012)
If left unpatched, a provision designed to keep the wealthy from avoiding taxes could also raise tax bills for millions of middle-income households.

Tannenbaum: Don't Get Alarmed by Fiscal Cliff Headlines (Dec. 11, 2012)
Any deal to avert the fiscal cliff will modestly hit the economy, but legislators won't allow the worst-case scenario--and subsequent recession--to happen, says Northern Trust chief economist Carl Tannenbaum.

Fiscal Cliff Isn't the Only Reason to Downplay Dividend Payers in Taxable Accounts (Dec. 11, 2012)
Prospective tax-law changes and loss of control top the list of reasons to downplay dividends in certain situations.

Debt Ceiling Debate Adds More Turbulence for Investors (Dec. 7, 2012)
Investors should prepare to ride through a rough patch as the impending 2013 debt ceiling becomes a bargaining chip in Washington's deficit debate.

Family-Friendly Tax Breaks at Risk From Fiscal Cliff (Dec. 4, 2012)
Higher tax rates and government-spending cuts aren't the only potential changes that might affect household finances.

A Sanity Check for Fiscal Cliff Watchers (Nov. 30, 2012)
We outline some big takeaways, likely outcomes, improbable outliers, and prudent strategies for investors anxiously following the fiscal cliff drama.

Stock Funds That May Buffer a Fiscal Cliff Dive (Nov. 28, 2012)
These domestic-equity funds feature below-average tax-cost ratios and risk ratings. 

Fiscal Cliff: Not Bailing Out, but Buckling Up (Nov. 28, 2012)
'I don't plan to sell any (let alone all) of DividendInvestor's stocks in fear of what could happen during the next two months,' says editor Josh Peters.

Bumpy Road Toward the Fiscal Cliff (Nov. 24, 2012)
While 'fiscal cliff' rumors are driving the markets (both up and down), this week's real estate-related news was quite positive.

Market to Congress: Time to Work (Nov. 10, 2012)
With large declines this week, markets were signaling that Congress must start solving the fiscal cliff--now.

Can We Tackle the Deficit Without Courting Recession? (Nov. 7, 2012)
It's possible to address the deficit while still maintaining economic growth, but swallowing the whole fiscal cliff at once would be too much for the economy, says Morningstar's Bob Johnson.

Measuring the Fiscal Cliff (Oct. 10, 2012)
Morningstar's Bob Johnson details the components of the upcoming so-called fiscal cliff, suggests a possible smaller-cliff scenario, and weighs the potential economic impact of both.

Guideposts in an Uncertain Tax Environment (Oct. 3, 2012)
Investors can do more harm than good when they start reacting to what they think might happen in a period of substantial uncertainty, says Vanguard's Joel Dickson.

Tax Talk: What to Do With Dividend Payers (Sept. 26, 2012)
Christine Benz answers reader questions about how to handle dividend payers in light of potential 2013 tax increases.

Tactics for Tax-Gain Harvesting This Fall (Sept. 19, 2012)
Taking a capital gain this year on some securities could pay off for certain investors, even if capital gains rates remain at lower levels, says Pinnacle Advisory Group's Michael Kitces.

Will Life Sciences Firms Fall Off the Fiscal Cliff? (Aug. 30, 2012)
Even if the NIH is drastically cut, we don't see a doomsday scenario for these companies, and some of the industry's stronger players are now trading at attractive valuations.

Sturdy Shelters for a Cloudy Tax Forecast (July 26, 2012)
Many of the best practices for tax efficiency are even more important for investors in light of possible tax increases next year, says Morningstar's Christine Benz.

Dividends' Appeal Will Endure (July 23, 2012)
Policymakers will likely keep tax rates low, but even if current rates expire, dividend payers would still offer a superior source of income, says Morningstar's Josh Peters.

Stay a Step Ahead of the New Medicare Surtax (July 16, 2012)
Munis, Roth IRA conversions, and proper asset location are more valuable than ever as tax rates could increase next year.

Anticipating 2013 Tax Changes Could Save You Some Dough (Feb. 13, 2012)
Advanced planning can help reduce your tax bills if and when tax rates pop back up.

Pat Dorsey (Sanibel Captiva Investment Advisers)
Stepping Back From the So-Called 'Cliff' (Dec. 11, 2012)
Despite all the hyperventilating in the media, these are the things investors should bear in mind, says Sanibel Captiva's Pat Dorsey.

Charles Schwab
Market at Mercy of Fiscal Cliff Until Resolution (Dec. 7, 2012)
Until we get past the cliff, fundamentals won't matter a lot.

Franklin Templeton
Fiscal Cliff Countdown: Templeton Perspectives (Nov. 30, 2012)
The fiscal cliff will come and go, but the United States’ debt challenges are entrenched.

Charles Schwab
The Fiscal Cliff, Bond Market Outlook and Year-End Tax Planning (Nov. 28, 2012)
Thoughts on potential year-end estate-planning strategies, given changes that might take place in 2013.

Legg Mason
The U.S. Fiscal Negotiations: Update and Expectations for the Coming Weeks (Nov. 28, 2012)
It seems likely that policymakers will eventually reach an agreement to avoid the worst possible outcomes. 

J.P. Morgan Funds
Investing in the Wake of the Election (Nov. 28, 2012)
Although the timing and composition of any deal is unknown, it is very likely that a deal will be reached.

The Path to U.S. Fiscal Sustainability: How Bumpy Will It Be? (Nov. 21, 2012)
Likely fiscal progress in 2013 could bolster the medium term outlook for the U.S. economy and the financial markets.

Congressional Budget Office
Economic Effects of Policies Contributing to Fiscal Tightening in 2013 (Nov. 8, 2012)
Significant tax increases and spending cuts are slated to take effect in January 2013, sharply reducing the federal budget deficit and causing, by CBO’s estimates, a decline in economic output and an increase in unemployment.

Lord Abbett
Surveying the Post-Election Landscape (Nov. 14, 2012) 
Now that the election is over, asset managers are assessing the opportunities and risks—such as the looming “fiscal cliff”—within their respective markets.

Oppenheimer Funds
After Election, Focus Turns to the Rest of the World (Nov. 12, 2012)
The fiscal cliff fight heats up.

After the Election, Fiscal Cliff Outcome May Surprise (Nov. 9, 2012)
Our base case for a fiscal cliff resolution continues to be a lame-duck mini-deal, but there is now a greater likelihood of so-called tail events.

Dividends and the Fiscal Cliff – Look Out Below (Nov. 9, 2012)
Near-term volatility in dividend stocks will affect the narrow spectrum of U.S. dividend payers with greater than 3% yields that investors have crowded into, including U.S. telecoms and utilities.

Charles Schwab
Election 2012: Takeaways for Investors (Nov. 9, 2012)
With the 2012 presidential election in our rearview mirrors, let's take a look at the results and discuss what investors might see in the coming weeks and months.

Northern Trust
The Election’s End Is Only the Beginning (Nov. 8, 2012)
In the aftermath of the election, here are some things that we’ll be watching for.

What Now, Mr. President? (Nov. 7, 2012)
What should Obama prioritize over the next four years?

The Election is Over – Now What? (Nov. 7, 2012)
Still divided Washington looks to address Fiscal Cliff, expired provisions. 

Columbia Management
Hiking the Fiscal Cliff (Nov. 2, 2012) 
Below are the key tectonic guideposts to understand how the interlocking tiers of political stratification could play out during the upcoming lame duck session.